Understanding Payroll Foundations
Master payroll foundations to ensure accurate, compliant, and efficient employee compensation processes.
1. Hire the Right Setup Leads
Payroll setup is part art, part science — and your setup lead needs both. Look for people with analytical chops and operations know-how, not just someone who can “follow a checklist.”
The dream combo:
- Payroll, implementation, and tax experience (bonus points for certifications).
- Comfort with HR/HCM/CRM systems — think ADP, Paylocity, Workday, Gusto, or similar.
- Customer service skills that make partners feel like they’re in good hands.
- Ability to troubleshoot like a detective but explain things like a teacher.
Why it matters: Your setup lead is the bridge between “signed contract” and “first perfect payroll.” Weak bridge = rough crossing.
2. Train on Payroll Fundamentals
Even seasoned ops folks need to level-set on the quirks of payroll. This isn’t just about cutting checks — it’s about making sure people get paid accurately, on time, and in compliance.
Introduction to Payroll
- What it is: Payroll is the process of paying employees for their work — but really, it’s about trust. If pay is wrong or late, it’s the fastest way to tank morale.
- The flow: Onboarding → Time Worked → Payment → Taxes → Reporting.
- A quick history: We went from paper ledgers and hand calculations (yes, with actual calculators) to today’s fully automated cloud-based systems. But here’s the secret — the rules haven’t gotten simpler.
Federal Payroll Tax Compliance
- Key acronyms to know:
- FIT – Federal Income Tax
- FICA – Social Security + Medicare
- SIT – State Income Tax (yep, even though it says “state”)
- FUTA – Federal Unemployment
- SUI – State Unemployment Insurance
- Employer vs. Employee Responsibilities: Employers withhold and remit both parties’ taxes, but they also fund certain employer-only taxes like FUTA and SUI.
- IRS Deposit Schedules: The IRS will label you as a monthly or semi-weekly depositor. Semi-weekly means you’re paying taxes within days of payroll — miss that, and penalties start adding up fast.
State and Local Payroll Tax Compliance
- State income tax withholding rules vary wildly — Florida? None. California? Complex.
- State unemployment (SUI), State Disability Insurance (SDI), Paid Family and Medical Leave (PFML) — know your state’s alphabet soup.
- Local taxes? NYC, Colorado municipalities, PA localities, and Ohio school districts all have their own flavors.
IRS Forms and Filing
Your bread-and-butter forms:
- 940 – Annual FUTA return
- 941 – Quarterly federal return
- 8655 – Reporting agent authorization (lets your provider file on your behalf)
- Plus: W-2, W-3, W-2c, W-4, 1099 series, and 1095-C for ACA reporting.
Pay Periods, Run Dates, and Pay Dates
- Frequencies:
- Weekly – 40 hrs
- Bi-Weekly – 80 hrs
- Semi-Monthly – ~86.67 hrs
- Monthly – ~173.33 hrs
- Quarterly – 520 hrs
- Annual – 2080 hrs
- Know the difference:
- Pay Period – Time worked
- Run Date – When payroll is processed
- Pay Date – When money hits accounts
These matter because tax deposit deadlines are tied to the pay date, not the run date.
Payment Methods
- Direct Deposit: Easiest, fastest, and most common.
- Live Check: For the old-school or unbanked employee.
- Manual Check: Used for corrections or off-cycle runs.
- Pay Cards: Reloadable debit cards — useful for employees without bank accounts.
Benefits and Deductions
- Pre-Tax: Health insurance premiums, 401(k) contributions.
- Post-Tax: Union dues, garnishments.
- Retirement: 401(k), 403(b), IRA — each has unique tax treatment.
Pro tip: Always calculate net pay after deductions — benefits can drastically change the take-home amount.
3. Employee Classification and Compensation
Classification mistakes are the silent killers of payroll compliance. Get it wrong, and you’re looking at back pay, penalties, and a very unhappy client.
- Employee vs. Independent Contractor
- Employees = on payroll, taxes withheld, eligible for benefits.
- Contractors = no tax withholding, 1099 at year-end, not entitled to employee benefits.
- Insider tip: If they’re telling the worker when, where, and how to work — they’re probably an employee.
- Exempt vs. Non-Exempt
- Exempt (salary) → Paid a set amount, no overtime required.
- Non-exempt (hourly) → Paid for actual hours worked, must track time, eligible for overtime.
- Why it matters: Misclassify here, and you might owe months of unpaid OT.
- Impact on Time Tracking & Overtime
- Exempt → Can still track time for project costing, but OT rules don’t apply.
- Non-exempt → Time tracking is critical. Every extra 15 minutes worked counts.
4. Employee Profile Requirements
Before you can process payroll, you need a clean, complete employee record. “Garbage in, garbage out” is very real here.
Required:
- Full legal name (first, middle, last — as it appears on their SS card)
- Home address with zip, city, and state (taxes depend on this!)
- Social Security Number
- Date of Birth
- Employment start date
- Termination date (if applicable)
- Federal and State tax filing status (from W-4/state equivalents)
Optional (but highly recommended):
- Email (for pay stubs, notifications)
- Payment method — if blank, default to manual check
- Pay rate or salary (especially if transitioning systems)
Insider tip: Always cross-check SSNs and addresses — typos here can cause failed direct deposits and mismatched tax filings.
5. Common Pitfalls
- Skipping Audits
- Don’t trust the “data looks fine” approach. Always audit gross-to-net and tax setups before the first live run.
- Misreading Prior Provider Data
- Every payroll provider labels things differently. “Other Earnings” in one system might be “Bonus” in another — and tax rules may differ.
- Late Go-Live Panic
- Clients who wait until the week before go-live to send data will cause chaos. Set deadlines and stick to them.
Insider tip: Build in a “dummy run” at least a week before go-live. This lets you catch errors before real money moves.
6. Sample Workflow
Intake → Extract → Upload → Audit → Balance → Go Live
- Intake: Gather all employee, tax, and prior provider data.
- Extract: Pull historical payroll reports and YTD data from the old system.
- Upload: Enter or import data into the new system.
- Audit: Review taxes, deductions, and earnings against prior provider records.
- Balance: Ensure totals match between old and new systems.
- Go Live: First payroll in the new system — watch like a hawk.
Pro move: Document every step — it saves you when something inevitably gets questioned later.
7. Where to Go for Help
Even experts get stumped — what matters is knowing where to go for answers.
- For process and system-specific questions: Submit a Zendesk Ticket
- For payroll law, compliance, or tax interpretation: Check the Foundations Knowledge Base or submit a Zendesk Ticket
- For unclear prior provider data: Directly interface with the employer
Insider tip: Never guess on compliance questions. Document the question, the source of the answer, and the decision — it’s your insurance policy.